The International Role of the Dollar and Trade Balance Adjustment

Abstract

ABSTRACT The pattern of international trade adjustment is affected by the continuing international role of thedollar and related evidence on exchange rate pass-through into prices. This paper argues that adepreciation of the dollar would have asymmetric effects on flows between the United States andits trading partners. With low exchange rate pass-through to U.S. import prices and high exchangerate pass-through to the local prices of countries consuming U.S. exports, the effect of dollardepreciation on real trade flows is dominated by an adjustment in U.S. export quantities, whichincrease as U.S. goods become cheaper in the rest of the world. Real U.S. imports are affected lessbecause U.S. prices are more insulated from exchange rate movements pass-through is low anddollar invoicing is high. In relation to prices, the effects on the U.S. terms of trade are limited: U.S.exporters earn the same amount of dollars for each unit shipped abroad, and U.S. consumers do notencounter more expensive imports. Movements in dollar exchange rates also affect the internationaltrade transactions of countries invoicing some of their trade in dollars, even when these countriesare not transacting directly with the United States.Linda GoldbergResearch Department, 3rd FloorFederal Reserve Bank-New York33 Liberty StreetNew York, NY 10045and NBERlinda.goldberg@ny.frb.orgCedric TilleInternational Research FunctionFederal Reserve Bank of New York33 Liberty StreetNew York, NY 10045-1003cedric.tille@ny.frb.org